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Notes on redistribution

Some entrepreneurs and some libertarians (or “liberaltarians”) appear to be warming to redistribution and the welfare state. But there’s a reexamination happening in left-of-center policy circles, too. I offer no opinion on that conversation here, but want to clip together a few references…

The limits of redistribution

Franklin Foer on Elizabeth Warren and the future of the Democratic party:

Nor is Warren’s driving obsession wealth redistribution. That’s important politically, because many Americans simply don’t begrudge wealth, and “inequality” as a clarion call hasn’t stuck… Rather, Warren is most focused on the concept of fairness. A course she taught early in her career as a law professor, on contracts, got her thinking about the subject. (Fairness, after all, is a contract’s fundamental purpose.) A raw, moralistic conception of fairness—that people shouldn’t get screwed—would become the basis for her crusading. Although she shares Bernie Sanders’s contempt for Wall Street, she doesn’t share his democratic socialism. “I love markets—I believe in markets!” she told me. What drives her to rage is when bankers conspire with government regulators to subvert markets and rig the game. Over the years, she has claimed that it was a romantic view of capitalism that drew her to the Republican Party—and then the party’s infidelity to market principles drove her from it.

Suppose we raised marginal tax rates on the highest income households from 39.6 percent to 50 percent… the increase would raise taxes by an average of $6,464 for those in the 95-99th percentiles (those with average incomes of $321,000 in 2013). Households in the top 1 percent (with average incomes of $1.571 million in 2013) would pay an additional $110,968 and those in the top 0.1 percent an additional $568,617… Now imagine that all of the revenue collected from this change was distributed evenly to the bottom 20 percent. The total revenue raised is $95.6 billion and allows each household at the bottom to have an extra $2,650 in post-tax income.

Between 1979 and 2012, the share of all household income accruing to the top percentile of U.S. households rose from 10.0% to 22.5% (8, 9). To get a sense of how much money that is, consider the conceptual experiment of redistributing the gains of the top 1% between 1979 and 2012 to the bottom 99% of households (10). How much would this redistribution raise household incomes of the bottom 99%? The answer is $7107 per household—a substantial gain, equal to 14% of the income of the median U.S. household in 2012. (I focus on the median because it reflects the earnings of the typical worker and thus excludes the earnings of the top 1%.)

He goes on to say that, in terms of total dollars, the rise in the college wage premium has been more significant:

This increase in the earnings gap between the typical college-educated and high school–educated household earnings levels is four times as large as the redistribution that has notionally occurred from the bottom 99% to the top 1% of households. What this simple calculation suggests is that the growth of skill differentials among the “other 99 percent” is arguably even more consequential than the rise of the 1% for the welfare of most citizens.

A predominant Democratic view is that the economy is mostly fine; it’s just a matter of adjusting and correcting it to ensure everyone has access. Deeper, structural, changes are put to the side in favor of taxes, transfers, and behavioral nudges to help people out.

On trade, for example, the consistent Democratic narrative in 2016 was that we need to “compensate the losers” of trade. The phrasing alone tells us everything we need to know. Which voters want to be identified as losers? Democrats may mean something more abstract when they speak of “losers” in a globalized economy, but the language carries the connotation of personal blame.

But what role does individual agency play when global capital flows upend communities? And why are we treating the economy as a natural phenomenon — one whose consequences we simply must accept — when voters know it’s a series of laws, trade agreements, and businesses making decisions? If this is the best Democrats can offer, it’s not surprising workers aren’t interested.

Here’s the shameful secret not uttered in our favorite futurists’ TED-style presentations. The reason they adore UBI isn’t to do with their commitment to lift a growing underclass out of poverty; that’s just a bedtime story that helps the super-wealthy sleep. Instead, it’s more to permit spending on their goods by what remains of the American middle class. No one on a stagnant wage can currently buy the things that Musk—and the rest of Silicon Valley—wants to sell them. These billionaires champion a scheme whose prime result will be their profit.

This paper suggests redistribution from rich to poor has been the historical norm for the last hundred years, and this paper suggests it improves life satisfaction. That’s broadly consistent with the historical data presented here on “social spending” improving human well-being, which admittedly may not map well onto today’s debates between redistribution and “pre-distribution” policies.

Rich countries are using their governments to redistribute enormous amounts of their total national income, through health care, pensions, poverty assistance and other measures. Sometimes, this doesn’t do much to equalize income distribution — for example, in the U.S., Social Security payments are roughly proportional to how much people pay into the system. But as Lindert shows, these social transfers are doing a lot to equalize incomes, generally cutting the Gini coefficient — a common measure of income or wealth inequality — by between a fifth and a third.